Tapestry Inc., the American luxury goods company formerly known as Coach Inc., plans to bolster the presence in China of its Kate Spade and Stuart Weitzman brands through new store openings and e-commerce initiatives, executives told S&P Global Market Intelligence in a Feb. 6 interview.
Tapestry said Feb. 6 that it has taken operational control of its Kate Spade joint venture for mainland China, Hong Kong, Macau and Taiwan. It also said it has agreed to buy the Stuart Weitzman business in northern China from its distributor, the larger of its two Stuart Weitzman distributor businesses in the country. Through the deals, Tapestry is taking control of about 50 Kate Spade stores and 20 Stuart Weitzman stores. The Coach brand already has a much larger presence in China with about 150 stores. CEO and Director Victor Luis said that eventually, the company wants to give both Kate Spade, known for its whimsical handbags, and Stuart Weitzman, a high-end footwear brand, a retail footprint in China that is similar to that of Coach.
It took Coach about 10 years to reach that 150-strong store count in China, Luis said. Although he declined to give a timeline for how long it will take the company to get the other two brands' store networks up to that scale, he said it will probably take less time.
"I don't think it's going to take as long with Kate," he said, just after the company reported its second-quarter earnings and raised its fiscal full-year 2018 guidance. "You can imagine a very steady five-year rollout."
Neither Kate Spade nor Stuart Weitzman has China-specific e-commerce operations, but Luis said digital sales are a "very important opportunity" for future development. Again, he declined to give an idea of how soon Tapestry would move into this area.
"We're very much in early days; I wouldn't commit a date to you. We have other areas that we're looking at with our global digital footprint across the three brands. Here in North America would be a priority, followed of course by China and Europe," he said.
The China market is key to the company's growth as well as for the branded luxury sector, Luis said. The Coach brand saw positive second-quarter comp sales growth and a "significant improvement in trend" in Hong Kong and Macau, Luis said on the analyst call.
"Half the population is in rural areas with urban growth still ahead," he said during the interview. "You've got the fastest-growing middle class in the world. The other thing about China which is exciting is the infrastructure exists for retail growth, whether it be for digital or, of course, for brands like ours which require some physical presence to drive the story with consumers," he said.
The company laid out its China plans as it lifted its guidance for the fiscal year ending June 2018. Tapestry increased it adjusted diluted EPS forecast for the fiscal year to a range of $2.52 to $2.60, compared to the previous range of $2.35 to $2.40. The company said it anticipates a 5% reduction in its tax rate thanks to U.S. federal tax policy changes. In a Feb. 6 note, Goldman Sachs called tax reform a "meaningful windfall" for Tapestry.
Asked if Tapestry might use some of its tax reform proceeds to invest in its workforce, Luis said the company already pays above minimum wage in most cases and offers benefits including health insurance and parental leave for employees who work more than 22 hours.
"Our philosophy is that we don't need a tax benefit to do what is right and fair for our teams," he said.
Tapestry said its Coach brand saw improved traffic in North American malls "for the first time in quite some time," for the second quarter ending Dec. 30, 2017, which includes the holiday shopping period.
The growth came from both retaining existing customers and recruiting new ones, said Joshua Schulman, CEO and president of the Coach brand, said during the interview.
"We saw strong performance across our retail outlets and e-commerce channels."
